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It is an interesting irony with Home Loans. Till the time a person does not have a home loan, he aspires to take one as soon as possible in order to purchase a home. Once he has taken a home loan, the first priority in his life becomes to repay his home loan even though it may come with a cost of his reduced standard of living. It is a prudent decision to repay a loan if one does not require it. After all why should you pay interest on a loan costing roughly 10% when you have idle funds sitting in your bank account account earning just 4% interest.

However there are a group of thinkers who do not believe in the philosophy of repaying back their home loans. Lets discuss the pros and cons of repaying a home loan and I will leave it to the readers to decide which is the best option suitable for them.

1. Reduction of Interest Payouts – The most obvious benefit out of prepayment is that your interest payout reduces. Prepayment of home loan results in an immediate reduction of the outstanding principal on the home loan which results in less interest being accrued on the loan account. For example, if you have an outstanding loan of Rs. 10 lacs at 10% interest, you would be annually paying approx Rs. 1 lac interest. If you prepay the loan by Rs. 1lac, your interest would reduce from Rs. 1 lac to Rs. 90K per year – approx 10 K saving per year for the duration of the loan.

 

2. Prepay – without reducing the tenure – Generally when you are going to prepay your home loan, you have two options. Either you can reduce the number of home loan installments or keep the number of installments same but reduce the monthly mortgage payments (EMIs). For example, if you prepay your home loan by Rs. 100,000, you may be provided two options :

a) Instead of paying your monthly EMI (e.g. Rs. 10K per month ) for original tenure of 120 months, reduce the tenure of the same monthly EMI of Rs. 10K to 110 months (illustrative) OR

b) Keep the original number of EMIs the same, e.g. 120 months, but reduce the monthly EMI per month from Rs. 10K to Rs. 9.5K, i.e. a reduction of Rs. 500 per month in monthly cash outflow.

I prefer the second option, as it results in improving the monthly cash flows by a lesser per month cash outflow and easing the family budgets. Any further cash savings on a monthly basis can then be used to further prepay the loan if needed.

 

3. Impact on Leverage

This is an interesting topic and in order to understand it let me take an example. John has an investment opportunity which requires Rs. 1 lac investment and it would provide him annually 15% return. His annual return in this case is Rs. 15,000.

Now lets bring in another situation, say John has just Rs. 20K in his pocket and he still has the same investment opportunity. John goes to a bank and takes a loan of Rs. 80K at 10% interest. His situation after end of the year would look like :

His investment – Rs. 20K and Loan to pay Rs. 80K.

Total Income from the investment (Rs. 1 lac @ 15%)         – Rs. 15,000

Less Interest paid on Loan (Rs. 80K@10%)                          – (Rs     8,000)

Net Income for John                                                                             Rs. 7,000

Return for John on his investment of Rs. 20K = 7K/20K x 100 = 35%.

The example above tried to show how leveraging work. Just like a normal LEVER is used to multiply the effort to lift heavy loads, financial levers use loans to multiple your returns – if used correctly.  Generally if the interest rate paid out is less than the return earned from your investment, you would gain from taking a loan.

In case of a home loan, if you perceive that your property is going to give you a return of more than home loan interest rate, you would perhaps be better off not paying your home loan. This is just a general statement and each case would need a specific analysis.

4. Debt Equity Ratio – This is one of the classic financial ratios and perhaps one of the first ratios looked into by analysts to identify how risky a financial decision is and hence determining the respective financing cost (interest rate). It works opposite to the Leverage example above. While leveraging mentions that the more your loan is, the better would be your net returns. However, the contrary aspect associated with it is – the more loan you have (in % terms), the more risky your investment become to the lenders. For example

John has a property valued Rs. 10 lacs of which only 1 lac has been paid by John from his pocket and remaining 9 lac (90%)has been taken on loan. John hence has a debt equity of 9:1.

Peter has a property valued Rs. 10 lac of which his contribution is Rs. 3 lac and remaining 7 lacs (70%)  has been financed via a loan. Peter has a debt equity of 7:3

If for examples real estate markets tank by 10% and the properties are now valued at 9 lac each, John’s stake would be reduced to zero and Peter’s stake would be reduced to Rs. 2 lac. If you are a financer giving a loan to John / Peter, you would rather want to avoid financing John as he is heavily leveraged and hence a more risky investor than Peter. In this example, John may walk away as he would not have any incentive to hold his property (considering it is less than the value he purchased and his entire investment has been wiped out). On the contrary, Peter would still be inclined to hold on to the property considering he has still 2 lacs of this investment in the property. Hence, even if the bank would want to finance John, they would charge a higher interest rate for the extra risk in that decision.

The reason why I explained the above – you may want to prepay your home loan to bring it within a comfortable debt equity ratio. Ideally this ratio is 7:3 to 8:2 i.e. Loan to Value of your property is 70%-80%. You may want to go even higher at 60%, but from there you start to  adversely affect your leverage ratio. Banks in many cases provide a better interest rate deal (specially outside India) if the Loan to Value is greater 80% or lower.

 

5. Use Mortgage as an Overdraft Account

This is one of the least used options available in the market. Outside India, the product is generally called as an Offset mortgage. In India, the product is sold by State Bank of India by the name Max Gain.  In this type of mortgage account, if you have surplus funds, you can deposit the funds in your bank / mortgage account and interest shall be computed on the balance mortgage loan. You are free to withdraw the deposit and the interest shall levied on the remaining balance. Hence, when ever you have surplus funds, you reduce your interest payouts. If you find an investment opportunity, you can withdraw the funds from your mortgage to fund your investments. By this way, you tend to get a good mix of putting surplus funds into work (by reducing interest payouts) and at the same time having the flexibility to get the funds back when needed. It is important to note that any deposits made in such an account do not end up reducing your mortgage balance permanently. The excess funds temporarily suspend interest accruals on the deposited amount till such a time these funds are not withdrawn by the account holder.

6. Create Investment Vehicle to Prepay – Should you still want to prepay, instead of paying your loan off, put the prepayment amount in an investment vehicle such as a Mutual Fund SIP. Our blog post Should I Prepay my Loan Or Invest Till End of Tenure explains this in detail.

Conclusion

In line with above mentioned paragraphs, you may want to revisit your current home loans / mortgages and analyse which side of the fence you are sitting. You may have a very high leverage and sitting on excess cash – probably a good idea to repay a bit of your loan. Alternatively, you have paid a good part of your loan and hence you may want to invest your excess cash in other investment options to avoid reducing the impact of leverage on your home investment decision. You may also want to refer to my alternative article Good Loans & Bad Loans and specifically for NRIs – NRIs – How to Leverage on Low Interest Rates. 

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249 Responses to Pros and Cons of Home Loan Prepayment

  1. kk Babu says:

    Dear Sir

    Thanks for your article.

    Pl. advise me, Is it a good to swap the housing loan from IDBI bank (10.75% floating interest rate) to SBI (10.25%)?

    Charges from IDBI would be 0.5% on present outstanding amt (Rs 16L)+ Service Tax 12.36% on 0.5%

    Kindly advise.
    Regards, Babu

  2. Hi Mr. Babu,
    It makes sense, but 0.5% interest rate difference is not really material in comparison to the hassle. I would suggest you to wait for another 6-12 months. Probably you may find more deals in the future with lower interest rates.

  3. SN says:

    A quick question here. I have a very small outstanding loan amount @ 7.75% Fixed. I have finances to close the loan with no impact on my savings, lifestyle or liquidity. Would it make sense to close the loan?

    Notes

    1. The loan tenure was 10 yrs and I have already completed 7.5 years. The interest component is very low and thus the tax benefits are not substantial.

    2. I do not need to declare the principal payout for tax purpose. I regularly invest in PPF for the same.

    3. Even though FDs would offer me a higher return (approx 9%), I do pay tax on interest income and thus the post-tax returns are not great (approx 6.3%)

  4. SN,
    If you don’t have alternative investment options, you can always close your loan account. However, if you are in a 30% tax bracket, it is important to note that interest on Home Loan provides tax rebate and hence your effective cost of loan further falls down from 7.75 by the tax slab you are in.

    Again, it all depends upon available investment options. 7.75% is very low – how many years do you still have before it reverts from fixed to floating ? If you have over a year remaining, you may want to put suplus funds in a money market fund giving you the same level of post tax return and hunt for any investment options.

    However if the amount of loan is very small – you may rather want to close it and avoid the noise it creates on your cash flows.

  5. AP says:

    I have my home loan at Axis Bank @ 10.5% with an out-standing of 6.5 Lacs untill 2015. I am in tax slab of 20%; I would like to confirm on option as whether to pay the home loan under pre-payment & close loan by this year or to continue with current deductions for next 3 years and use money somewhere else?

  6. The answer is not straight forward. It depends if you have investment options. 10.5% interest is effectly around 8% for you after tax. If you think that your other options are going to give more than this rate, then don’t close your home loan account.

  7. Rohit says:

    I want to purchase a house costing around 15L. My net savings would be 15K after all expenses and investments.I don’t have any other loans (personal/auto/home).Is it wise to go for a purchase of new house or not ? Pls advice me
    -Rohit M

  8. Rohit,
    It is not a straight forward answer. Indeed buying a house is one of the best investment options. However, if you are planning to live in the same house, then the dynamics change. Check out http://insight.banyanfa.com/your-house-drain-on-finances/. Your cost of home loan repayments would be offset partially by rent payouts. The question which you need to ask yourself is – would you be able to repay the home loan installments with a 15K savings ?

  9. Gopinath says:

    Dear Experts,

    I have two loans, one is main (A) with 10.75% Outstanding is 16L and other one (B) with 12.25% outstanding is 3.5L. I wanted to go for pre-payment on any one of the Home Loans. Kindly give your advise.

    Best Regards

    Gopi

  10. You can go for one with higher interest rate.

  11. mylifedesirehn says:

    Excellent blog!

    Thanks for sharing your expertise to people who need this like us.

    I am in dilemma if i should prepay my home loan which is with HDFC. I have 96 Months to go (Out of total 180 Months) and EMI =18500 per month. Banker said i have already passed my initial days where you have higher Principle amount compare to interest amount hence he did not encourage me to prepay.

    Also, another concern is if i pre-pay and obviously my burden could be less but on other side i might be loosing Tax benefits. Also i desire to take another Flat but minimum rate of 1.2 Cr for 3 BHK is out of reach. How should a Middle class family look and plan to fulfill his desire of such impossible target amount.

    Thanks & Regards
    John

  12. Priya says:

    Dear Sir,
    Please advice me LIC is good option for home loan. I gonna take home loan for 17 lakhs tenure period of 20 years. Interest rate 10% fixed for 2 years and later floating. Please tell me what are the pros and cons of taking loan in LIC.

  13. Priya
    There is no cons of taking a loan from LIC. If you get it cheap – why not.

    Further, if you can, go for fully flexible interest option. You dont need a fixed interest rate option in the current markets as the interest rates are on a down trend.

  14. pradeep says:

    i have an home loan outstanding of 11.35lakh and no of emi pending 192,Iam planning to prepay partial amount and requesting the bank to keeping the original number of emi, the same but reduce the monthly emi per month for the balance loan outstanding, pls advice me…
    planning as soon as possible to close this current housing loan and go for new house home loan
    pls suggest.

  15. Pradeep,
    Your thought process is perfect for reduction of monthly EMI rather than the number of EMIs.

    One thing which I couldn’t understand – If you intend to take a new house home loan, why do you want to close your current house loan ? Instead of paying out your Homeloan, invest that fund for short term and take a lesser new home loan.

  16. pradeepkumar pv says:

    investing on land or new house will definetly returns in old age, can expect additional income as rent from any one property, based on the market rate, for an new house minimum i need 30lakh which i cant affford without bank loan,if i can close with in six months my loan outstanding,and planning for new house purchase can manage the new loan emi, later i can sell one property and have solid amount for my retirement life

    current loan interest is under base rate of interest,

    my plan is to never keep paying emi for entire 15 or 20yrs tenure,maximum savings to loan prepayment

    pls advice if my thoughts are wrong

  17. Sankar says:

    Hi,
    First of all very nice and informative article ( and also the Q and A). I am a salaried person in 30% tax bracket and I have taken a home loan in 2004 for 22 lakhs with 7.5% fixed rate with an emi of around 21,000. I have no problem in continuing that payment. However, an insurance agent tells me to prepay the entire amount and invest the amount equivalent to EMI in insurance. He strongly says that there is no merit. I am a bit confused.

  18. Sankar,
    I just can’t stop myself smiling to see a dishonest Insurance agent trying to make his living by directing your funds to suit his income objectives. At 7.5% interest rate (a bit unheard of in India), after tax you are having around 5.25% interest payout. Insurance plans would not give you over 6% return.

    Positive side of it, you have now found an insurance agent whom if I was was you, I will never keep in touch. Check out my other article http://insight.banyanfa.com/ten-warning-signs-of-a-dangerous-financial-advisor/

  19. chris says:

    sir,
    i had taken a NRI home loan with sbi for 26 lakhs couple of months back for 10 yrs tenure..and it is a max gain loan acct.

    couple of questions.

    1.i had a pending balance of 25.2 lakhs and last month i made a lump sum payment of 5 lakhs.
    and now my balance in loan is showing 20.2 lakhs..now,per max gain, is the interest calculated only on 20.2 lakhs and i will still be able to withdraw this 5 lakhs whenever i needed it in future.
    2. is it mandatory to take insurance with every home loan,sold by the SBI bank.what do these insurance actually cover for?
    3. you mentioned about two options – in case of prepayment,we can ask for either reduce tenure or reduce the EMI amount..I dont remember selecting any such option at the time of home loan application..should i interfere now and let the bank know that i want the EMI to be reduced as a result of this 5 lakhs prepayment but not the tenure.
    4. who is actually benefitting out of this max gain product..is it the bank or the customer and in what way…

  20. Chris,
    Max gain is a different kettle of fish. Not every bank offers this kind of facility. Take it this way that you have an overdraft facility available at your disposal at home loan’s interest rates. My responses are
    1. Correct
    2. Not needed. However, as a good practise you should have a term insurance either in India or in your foreign country to cover atleast for the loan amount.
    3. In case of Max gain you don’t need to worry about these options. Effectively you pay interest only for the outstanding principal in Max Gain and hence your EMI amount gets reduced.
    4. I would say that the customer is benefiting here as he is getting excellent liquidity at homeloan rates.

  21. Abhishek Katti says:

    Is simple interest is applicable on loan balance when I do the part prepayment. I have hdfc home loan and when I go for prepayment on 5 or 10 the day of the month they charge simple interest on loan balance. But on 1st day no interest is charged.
    Please suggest what this simple interest means and why they charge as I’m doing part prepayment.

  22. Abhishek,
    Apologies but your question is not clear.

  23. Arunmozhi Sivam says:

    Nice informative blog!

    I took a home loan last month for 30 lakhs(broke the home loan into two loans – a 20 lakh home loan and a 10 lakh top up loan to avoid minimum emi pre-payment constraint and to lower the property registration charge) @10.15% for 15 years..I have already made a pre-payment of 35,000 in the 1st month towards the top up loan and I plan to do it regularly.

    A couple of questions related to this.

    1. I have opted for the decreased tenure option rather than the emi decrease option during pre-payment.Is this the right choice from a savings perspective or If I regularly prepay will the latter be a better option?

    2.
    i)Should I prepay and finish off the top up loan (10 lakh)completely before pre-paying the 20 lakh loan..It will take 2 years to finish the 10 lakh loan and to finish off the entire loan it will take 5 years 3 months, with this approach
    or
    ii)should I just pre-pay the top up loan till the principal part of the emi portion is substantially larger than the interest portion and start prepaying the main loan(20 lakh) say from 18th or 20th month

    Is there any potential saving difference between 2(i) and 2(ii) options.Please do let me know

    Thanks,
    Arun

  24. Arun,
    I am not able to see the benefit of having two loans if they have essentially same interest rate and tenure, except from the registration perspective. From repayment point of view, you can pay off any of them as they have the same terms.
    However, If I was you, I would have opted for EMI decrease option than the tenure option. The rationale behind it is detailed in the post itself.

  25. Saurabh says:

    I have taken a Loan from LIC on year back for around 25 lakhs. If I want to repay, will I get an option to reduce my EMI rathar than tenure of the loan?, the same option provided by you.

  26. RAJASHEKAR says:

    I have taken Housing loan of Rs 25,00,000/-from SBM at @ 10.5% for 20 Years.I have started my constructions it will be finished by Oct 2013.My question is, as of now i have taken Rs 10,00,000/- further i need Rs 5,00,000/- to finish it.Can i tell the bank authority that Rs 15,00,000/- is enough,then what will be my EMI,whether they will calculate EMI for Rs 25,00,000/- and reduce time period OR will they calculate for Rs 15,00,000/-.If i want pre close my Loan what is the minimum time peroid for start of EMI

  27. Saurabh,
    The terms & conditions vary from one company to another. I would suggest you to contact LIC to get clarity on this.

  28. Rajashekar,

    Bank will charge you interest on the amount you have drawn down and your EMIs will be based upon this amount only. The 25 lacs amount is perhaps sanctioned amount and you can borrow upto 25 lacs.

    I couldn’t understand what you meant by your last question on minimum time period for start of EMI.

  29. prakash says:

    A very helpfull article….many Thanks.
    I have a loan of 20L from LIC and am paying currently 22650/- EMI.
    I am planning to repay 10L and for remaining 10L, I want to make reduce EMI i.e 10K EMI.
    Is it possible and good to go ahead?

    Also I am planning to buy one more House and loan can go around 30L. As said above saving 10K EMI in older loan can be used in new taking loan EMI.

    Please kindly advice me since I am very much in confusion..
    Thanks in advance sir!

  30. Prakash,
    If you already planning to take a new home loan, then why do you want to have the hassle of repaying one and taking another. You would end up paying processing fees on the new loan, which you can avoid if you don’t end up repaying your current loan.

  31. Sonali says:

    1) I applied for a home loan in a financial institution. It was applied with a fixed rate of 10.5%. During the processing of the loan the financial institution has changed its fixed rate from 10.5% to 11.5% and it is telling that my home loan will be processed with 11.5%. Whether it can do that?
    2) To insure the loan amount, what is your suggestion : Loan cover term assurance or Life insurance with critical benefit, as in the second option gives some amount of return?

  32. 1)If the rate has been quoted to you as 10.5% at the time of application, they can not change it. You can raise a formal complaint against it and see how it goes. Ask them for their formal procedures which give the bank this right to change fixed interest rate after application.
    2) You must take a Term Insurance plus a Critical Illness cover. You don’t need a life insurance with comes with maturity benefits as the premium of such plans is much higher for same level of cover.

  33. Lakshmi says:

    Is it good to do the prepayment during the start of the loan tenure Or in later stages. I understand that the interest part is more during initial stages and advantage for tax savings / rebate. Please advise.

    Thanks.

  34. Lakshmi,
    The impact will be the same when ever you prepay. From the date of prepayment, the interest shall stop accruing on prepayment. It is true that interest is deductable for tax purposes, however so is true for principal prepaid as well (upto Rs. 1 lac u/s 80C).

  35. Ashish says:

    Dear Sir, what is the benifical option of the two:
    1. Loan of 20 yrs (EMI 24542/ PM) and doing prepayments and finish the loan within 10 yrs
    2. Loan of 10 yrs (EMI 33385/PM)

  36. Ashish,
    In our opinion, option 1 looks better. You always have the option of prepaying a specific % of your loan every year without penalty. Having longer duration will give you a flexibility to have smaller EMI amount and ease your cashflows. Any surplus cashflows can then be used to prepay the loan quicker.

  37. Tharique says:

    Hi BFA,

    I have taken a floating rate (13.75% RoI) mortgage loan (Loan against Property) from LIC HFL on Sep 2010 for Rs.10 Lacs. Have paid regular EMI’s for 3 years and only Rs.25,000 has reduced from the Principal. Last month, I did a part-payment of Rs.2 Lacs after assurance from LIC agents about no charges. But LIC charged me 2% (around Rs.5000) as lumpsum charges. I confronted them saying I had enquired, but they are arrogant that charges are applicable for mortgage loans, only for home loans there are no part-payment/pre-closure charges. I felt cheated.

    My Outstanding principal is now around Rs.7.70 Lacs. I am thinking of closing the loan by arranging fund from personal sources. Let me know,

    1) What will be the pre-closure charges in LIC-HFL for mortgage loans. I have seen news-clips where RBI has notified banks to not charge pre-closure for loans. Is that applicable to mortgage loans.

    2) Should I transfer the mortgage loan from LIC to another provider (say, Bank of India) who will offer lesser RoI and then pre-close the loan after few months.

  38. skg says:

    I have a home loan of 67.5 lacs tenure 240 months @ROI 10.65%. My EMI is 67000/ pm. I have prepaid some amount after which my tenure is 185 months. I am in a position to pay an additional 15000/ pm towards prepayment and plan to prepay my loan in next 6-7 years. What i want to know is that which option is better –
    A. if i prepay some amount and get the EMI reduced to ~ 50000/pm and use this surplus 17000 (EMI 67000- 50000) for regular prepayment over and above my 15000/ pm as before.

    B. I prepay and opt for reduction in tenure only

    I shall be thankful

  39. TB says:

    I plan to buy a house worth 34000 USD. Wana do downpayment 17500 USD and rest wud be a 10 yr mortgage. may be @ 8.5%. Does it make sense to prepay the loan?

  40. I would have gone for option A. This would ease your monthly cash flows from 67K to 50K. Any further 17K saving could be further used to prepay when you have surplus funds. The advantage of this method is – in an event of shock on your earnings, you have to worry about smaller payments and can be a big savior to avoid bouncing the EMI payments and hurting your credit rating.

  41. TB,
    As I mentioned in the article, there is no right or wrong answer. It all depends upon other investment options which you have after you purchase your house.

  42. Sam says:

    Hi,

    Need some advise please..

    I’ve taken a housing loan in the year 2006 of Rs. 12 lacs for 20 years. Its been 7 years & I’ve been paying my EMI’s properly.

    Monthly EMI is Rs. 11040/-

    Fluctuating interest rate @ 9.50% (being Nationalized Bank interest doesnt fluctuate more, it remains near the same only)

    Today my Housing loans still stands at Rs. 10 lacs + something.

    I’ve saved certain amount & wish to pay off approx 3.5 lacs out of total Rs. 10 lacs to reduce the loan burden, however one of my friend advises me “”Not to pay in Housing Loan but Invest in a Fixed Deposit. Only continue paying EMI’s as actual””

    Can someone please advise how it would be beneficial?

    Regards,

    Sam

  43. Sam,
    As you would have read in my article, if you have an option to invest which gives you better return than saving your home loan, better go for that investment option. There is no right or wrong answer. It all depends upon your personal appetite to have a loan. You could alternatively use this 3.5 lacs to invest in other small plot of land or invest in Equities via SIPs for long term (around 5-10 years).

  44. karthic says:

    Hello sir,
    im going to apply for a home loan in LIC.
    which interest rate i can opt for?

    a) fixed for 2 years with rate 10.6% and after that floating or
    b) fixed for 10 yrs with 11.50%

    Im planning to close the entire loan with in 5- 10 years.

    mean while can i do pre part payment from other funds if i chose for fixed interest rate?
    i heard it will cost additional charges.

  45. Narayana says:

    Hi,

    I own an apartment with my wife (co-owner) and do taken a housing loan in both the names. She is house wife and not contributing for EMI. Now if I would like to claim complete tax exemption (1.5L interest + principle), then what is the procedure? Please explain.

    Thanks,

  46. Sam says:

    if the hsg loan is in your name as primary acc’ holder, you can get complete tax exemption (1.5L interest + principle),

  47. Kiran says:

    Sir,
    I have a home loan for Rs.7 lakhs from SBI, out of the total number of 120 months, I have completed 77 months of repayment. Outstanding amount as on today is Rs.302000/-. Current interest rate is 10.10%. Please advise if prepayment of the outstanding amount is beneficial in my case and what would be the savings on interest?

    Thank you

  48. vikas patil says:

    is there any margin to rise in amount of emi in case of floating interest rate if yes then what is that

  49. Nara Mohan says:

    Hi

    I have 20 Lacs home loan for 20 years with EMI 16,790 Per month.Loan Started in OCT 2012. I am NRI staying in USA. I am planning to repay total loan in 2 years. I have 10 Lacs Savings.shall i pay 10 lacs as i recently completed one year tenure. I hear that Prepay is not wise decision.I can manage my expenses comfortably after prepaying total amount.Please advice me.

    Thanks
    Mohan

  50. Raj says:

    Hi, I am NRI and wish to purchase a flat in india worth 75 lakhs. I have the full money with me but still thinking to take home loan. I can deposit my money in FD and pay the home oan EMI from the FD interest. Is it a good idea or you suggest me to close the deal with full cash itself. Since i am NRI, i dunt gain anything from TAX point of view i think. pls share your thoughts. tks.

  51. Shiv says:

    Dear Sir,

    Thanks for educating us .Also, kudos to a very healthy discussion too ! I wish you reply my query.

    I agree keeping the tenure fixed but reducing the emi will improve the cash-flow. I also agree that the excess funds can be pre-paid or invested in other places like equities /FDs.

    In my case, I fall in 20% tax bracket and have applied for a home loan of 16 lakhs at 10.25% to buy plot in Bangalore. I am about to get married next year. So far, @ age 27, I have a healthy cash-flow. Do you think it’s wise to choose a reduction in emi or tenure when I prepay later. Also, in a year, is it only time can we make a prepayment without penalty? Please see that I might need another loan for construction at this site or for buying a new apartment in 2-3 years timeframe.

    I have a term insurance of 50 lakhs and invested in ULIPs and PF covering my 80c part.

    Look forward to your response !

    Thanks !

  52. Karthic,
    Please check for the floating interest rate loan as well. In the current environment, the chances are you would be much better with a floating rate. You could avoid thinking about 10 years fixed rate of 11.5%.

    For fixed rate loans, the banks may charge for part payment. However, considering LIC is not a bank, it would charge you for any part payment. As a result, I would recommend you to contact other banks as well.

  53. Narayana,
    This is a matter of constant dispute and the most followed approach is – who ever pays for the EMI claims the exemption.

  54. Kiran

    Definitely you would be saving on interest if you end up prepaying your homeloan. But the question to ask is, if you have any other investment opportunities where you could gainfully invest this money ? Once you prepay your homeloan, what would you be doing with your ongoing saving ? Would you invest in any property and take a loan again ? If yes, then better use your surplus funds to buy a property now rather than to prepay existing loan.

  55. Mohan,
    As I mentioned in my article, there is no right answer which fits all. You need to evaluate your investment options which you have along with your future cashflows.

  56. Cash is king. If you can get a homeloan, then it may be a better option to take 2 properties and take a loan for both of them. This shall give you a leverage to invest multiple times of your existing cash balance. Continue to pay emi for a couple of years and you can then sell one of your house to pay off the home loan on both the houses and make a fortune.

  57. Shiv,
    If you intend to take loan further on, then better not to prepay your loan in the first case. You may be better off to keep paying the EMI. Unless you have SBI Max gain home loan. Considering that you are in 20% tax bracket, your returns would be effected by the tax. However, you may invest in a debt fund with a 3 year period on the amount you wish to prepay. After 1 year, it would be under 10% tax.

    In your case, it would be better to choose reduction of EMI.

  58. Raj says:

    Banyan Financial Advisors says:

    October 22, 2013 at 6:53 pm

    Cash is king. If you can get a homeloan, then …………..

    Thanks for the reply. well, eventhough i am an NRI, but my money will be with my father account(senior citizen) soon. so i am thinking to use his FD account to deposit 50lakhs and get the monthly interest to pay my home loan EMI evey month. But i am concerned about the TDS deducted for the 50lakhs deposit from his account. so kindly suggest me what should i do in this case and what type of FD i shud use etc ? Tks in advance.

  59. raj says:

    hi,
    i recently(9months) bought an apartment for 36Lakhs +woodwork(2lakhs) = 38 lakhs, i am getting monthly income of 12200 out of that apartment ,i have an outstanding loan of 16.95 Lakhs(original loan amt 26 lakhs) on the same.since i made a partial payment of 7.5 lakhs.
    Now i got to know about another apartment for 12 lakhs(15 yrs old) but it gives me a rent of arround 6000 per month.is it advisable for me to take a loan of 8 lakhs for the amount i paid to buy this new one( i can put 4 lakhs from my savings) or should i wait for another 1 -2 years till i have enough savings and not to rush into things .
    P

  60. Amit K Singh says:

    Dear Sir,

    I am maintaining NRI status as i am in merchant navy and I have a home loan of 33 Lakhs from Axis bank at ROI 10.25% fixed for 12 years. I am paying the EMI Rs 39916 regularly since last 2 years. Although i have the cash of 33Lakhs, i have put it in a NRE FD at 9%with SBI. Is it profitable to close the home loan or is it profitable to continue paying EMI and enjoying the FD interest which is on cummalative basis.

    Thanks & Regards
    Capt. Amit K Singh

  61. Mic says:

    10% Interest Rate WOW ,That’s too Much
    In USA 2.75% to 4% depends upon type of Loan

  62. Chiru says:

    Hello Sir,

    I am planning to take plot loan in AXIS Bank. My question is any prepayment/preclosure charges in axis bank?

  63. Umesh Mehta says:

    Hello Sir,

    I have taken Home loan of 19L for 20yrs. I calculated with Loan calculator the total amount which i have to pay to bank is around 40L in 20 yrs. My question is that If i do prepayment and try to complete within 10 yrs then do i still need to pay around 40L or it will be lesser ?? interest rate is 10.25% with HDFC.

    Please reply
    thanks
    Umesh Mehta

  64. Kris says:

    Hi Guru, I am confused with two options regarding purchase of a flat. Builder gave me a option of already completed project and another project completing after 2 years. Since i am staying outside india and main motive is investment and thereby rental income, therefore which one gonna be a better option for me out of these two? i can get 80% loan and downpayment money is available with me now.i think advantage of comeplted project is i can start getting monthly rental income immediately where in the other project i can make better arbritage. so pls share your comments. tks in advance…Kris.

  65. Chris says:

    Hi Sir, May I know whats the best option for an NRI in case of investment purpose, either Landed property(with a house or without house) or Apartment(flat)? My intention is pure investment and not for staying, whats the best returns for me? pls share your opinion. i heard landed property is a safe bet if i want to sell after 10 yrs but i am not sure how much profit i can make when i sell my flat after 10 years? i am looking for 1 crore investment with 70% from bank loan. pls share your ideas. thanks in advance.

  66. Ashish says:

    Dear Sir,

    I have taken a lon of Rs 25 lakhs, from HDFC, for 25 yrs only 03 yrs has passed, I have got money to repay it, but invested that money in FD, post office and equity, is it worth to repay loan or continue the emi. my 80c is full.

    kindly advice

  67. Dear Sir,

    I have recently taken a loan from HDFC for 60 Lacs (180 Installments) @10.5%. Today, I went to do a part prepayment for 5 Lacs and I was suggested by HDFC people to reduce my total no. of installments than reducing the monthly EMI’s, they said that it’s better that way as reducing the tenure makes you reduce your interest amount while if you reduce your monthly pay out the interest amount remains intact (i.e. no deduction in total interest calculated for 15 years at full 60Lacs) and only the principal reduces! I was shocked to hear this! Can you please let me know if this is correct?

  68. Kalaivani says:

    Dear Sir,

    I have 2 housing loans. 1. With LICHFL – Rs. 1500000 – 14.75% Floating interest -Tenure 20 yrs- paid EMI for 3 years and 2. With HDFC – Rs. 1800000 – 10.25% Floating interest – Tenure 20 yrs – Paid EMI for 1 Year. I would like to reduce amount paid on interest. I wish to pay the prepayment on monthly basis of some 20K every month instead of paying a lump-sum amount. Is it possible to do monthly prepayment of principle amount? Also please advise on which is the best one to be closed before in the above two options.

  69. Raj
    If you can service the emi of the new home along with old home, you may go ahead with this decision. However, try to diversify your investments by also investing into Equity markets.

  70. Amit
    As always I maintain my views that it depends upon opportunities at hand. It does not make sense to pay interest if you have surplus cash which you cant invest gainfully. Hence you could repay your loan and then take a loan in future if needed.

  71. Hi Umesh
    The 40 lac figure is based upon the assumption that you do not prepay any loan amount. If you prepay it, the interest on the amount prepaid will not be charged and hence reducing the overall amount paid back to the bank. The banks generally charge nothing if you pre-pay the loan from your own sources.

  72. Kris
    Unlike western countries, India does not enjoy a good rental yield. Max you may get 2-3% rent on your investment. Hence investing for rental yield is not a good idea. Hence, you may want to choose the option which is under construction so that you can pay in stages. The advantage is that the property prices will increase gradually over a period of time and you will be able to leverage on the 100% price by paying only a small % initially.

  73. Pedias says:

    Hi BFA,

    I have an housing loan from HDFC for 28 lakhs at an interest of 11.25% with an EMI of 37,800/ for 10 years. Before the start of the EMI I have paid a total interest of 3,64,000/- till date due to the staged construction of my home. My EMI payment is being done for the last 6 months.

    Since I reside in the middle east, I have an option of taking up a loan here for upto 32 lakhs at 4% interest at a slightly higher EMI of 64,000 Rs for 4 years and there by would be able to close this chapter of loan earlier (4 instead of 10). I would lose a loan processing fee of about 160000 in this.

    But if I can close this by 4 years then I can start for a new investment if required by taking a new loan.

    Please advise if this makes sense and is the best option as the lower interest here is luring me towards doing this and also guide me if there will be a pre payment penalty by the bank and if so how much will it be.

    Appreciate your councelling on this.

    Pedias.

  74. Chris
    A plot of land has the best appreciation but attracts the risk of land grabbing. On the other hand a flat may protect from this risk, but you own a very small portion of the land which gains in value. Essentially the value of flat building depreciates over time. Alternatively instead of investing in one plot, you could diversify into two plots. But you won’t get a home loan in case of a plot. You could also buy a poorly built house just for its land value. The returns in case of plot over a long term should be around 15-20% year on year.

    Have you thought about investing in Equity markets as well which give similar returns in long term ?

  75. Ashish
    If you do not have any investment option available, you are better off to repay the loan. After tax returns from all of your current investments do not justify keeping the loan balances.

  76. Varun Sunny,
    The HDFC guy had no clue what he was speaking about. Once you prepay 5 lacs, your principal immediately reduces by 5 lacs. This results in lower interest being computed which is reflected in lower EMI per month. I would suggest you to opt for reducing EMI option so that you have the flexibility to further prepay in future at the same time ease your family budget with lower EMI amount.

  77. Kalivani
    Firstly you need to check with LICHFL if they accept prepayment without penalty and their minimum denomination. Same needs to be done with HDFC.

    I believe even if LIC charges you prepayment penalty, you should prepay it first as it is of a higher cost compared to HDFC.

    If LIC does not accept monthly payment, then you can make payments on a quarterly basis by visiting their office.

  78. Pedias,
    I am not aware of your financial situation – would you be comfortable with a 64K payout on a monthly basis instead of 37.8K? Why don’t you take a middle way ? Take a loan of half of the outstanding, e.g. Rs. 14 lacs in middle east and prepay your India loan in part. This will leave you in a situation like :

    14 lacs @ 11.25%
    14 lacs @ 4%.

    The advantage of this option is that you would have liquidity to take further loan from Middle east if some investment opportunity comes up. Further, it will prevent immediate stress on your family budget owing to faster repayment of loan in 4 years instead of 10.

  79. Raghu says:

    Good Blog with information.

    I have a HL of 25 L from LICHFL taken in 2012 (EMI – Rs. 28010 started from June 2012). The int rate is 10.70% fixed for 1st 3 yrs. i.e until 2015. Will it be a good idea to make prepayments towards the HL. I can afford to pay at least another 25-30 K per month, from Jan 2014. My reasoning is, major part of the loan payment today is towards interest, so pre-paying initially should ease/reduce the overall interest paid towards the loan. please suggest.

  80. pradeep says:

    I have two HL one in federal bank and other in sbi HL( new loan), keeping SBI HL I would like to close federal bank HL balance amount of 6.75lakh, earlier this year I have made prepayment of 4lakh, I am expecting my father property share by end of feb , there is any limitation for the loan prepayment as per income tax an transaction for above 10lakh to loan closure or shall I plan for next financial year.

  81. Pradeep,
    You can close the loan amount by prepaying any amount. Income tax does not pose any limitation.

  82. ravikumar says:

    The home loan is very common type of loan that is availed by the common man for the purchase of home.I would like to thank you much for providing such a use full information. This information really helps every Indian who has taken home loan..

  83. Raja says:

    I had taken a loan of 50L with an EMI of Rs. 49000. After around 5 years and a lot of pre-payment, the outstanding loan amount is 17L (Current ROI is 10.25%). I wish to take a top up loan of around 20L but dont want the EMI to be more than the current EMI, so I am going to shift my loan to another bank which will do the balance transfer of 17L and give me a top up loan of 20L, both for a period of 20 yrs and 10.25% ROI, which will bring my total EMI down to around 37K. (Current bank is not ready to reduce EMI or give top up loan more than outstanding loan amount)

    question:
    I need the 20L after 7-8 months only, not now. However the interest rate offered by the bank is 10.25% on both products only if I transfer my loan before march. Is it wise to

    1. Do the balance transfer now and start paying EMI on 37L (around 3L interest would have been paid in 7-8 months)

    or

    2. Wait for 7-8 months and then do balance transfer which would mean my current home loan would reduce by another 2.5-3L. So my total loan requirement after 7-8 months would be 33L only. however this time the top up loan will be available at 12.5% and home loan at 10.25% (considered for simplicity)

  84. Ravi says:

    I have a personal loan of 4Lakhs (13.99%) with monthly EMI 13699/- for 3 years. By end of 1st year interest paid will be 52071 and Principal 125625/-. If I close after 13th month I have to pay penalty of 16000 (4% on 4L) and bal principal of 274374. Point is, instead of pre-closing, if I deposit 274374 with min 8% int FD, at the end of 3rd year, though I paid 492084, I earned int money of 46460. So, the net amount i’m paying is 445624. Is this strategy good?

  85. Raja,
    You should wait till you need the funds. The banks may pressurize you to go before the March date to meet their year end targets. You may continue to get the deals even after that date.

  86. Ravi,
    The spoiler will be the tax on your FD interest. Hence please consider that in your calculations. If you have the funds ready, I would suggest to close the loan account. This will ease your monthly cash flows for future months.

  87. Vivek says:

    Hi ,

    I have taken a home loan in 2007 for 15 years , over the last two years i have saved enough to repay the balance loan of approx 9 lacs . I normally invest in FD and some Mutual Funds , kindly advice if repaying the loan in my case is the right thing to do . The Loan interest rate is 7.64% and it is fixed .

    Regards,
    Vivek

  88. Vivek,
    @ 7.64%, you may be better off to invest the funds in your FDs / Mutual Funds. However every situation is different and needs to be analysed in a bit detail to find the right approach. Please refer to the responses below and you may be able to get your answer.

  89. Sam says:

    Hi …Thanks for this excellent blog…I am planning to transfer my loan from ICICI(10.50%) to SBI Maxgain (10.15) .. I am planning to to deposit 8000/month to my OD account…Pls explain is this going to help me or should I start SIP in mutual fund ?

  90. Deepak says:

    I am an NRI and I own 2 flats in India. Flat 1 – Has a home loan from IDBI for 20 years. only 4 years passed. Flat 2 – no loan – fully owned since 12 years
    1. Can I sell Flat 2 and use the money to make a home loan partial/full pre-payment for Flat 1?
    2. Would paying off an existing property loan be considered re-investing in property and affect tax liabilities in any way?
    3. If 2, above is not possible, then what is the best way to avoid/minimize capital tax gains?

  91. trupti says:

    Hi,

    May i know whatever the prepayment amount we pay to the bank, how is it adjusted between principle and interest? I mean the entire payment will go to principle or divided into both. Please explain with example.
    Thank you,
    TS

  92. Sam,
    By paying off your homeloan, you will save interest @ 10 %. If you have a taxable income, the saving gets reduced by your tax slab as interest on home loan is allowed to be taken off from your income for tax purposes. So if you are in 30% slab, your effective interest rate saving will be around 7%.
    Definitely MFs will give much better return over 10 year period. Alternatively you can take a middle route of putting 50% in OD and other 50% in MF via SIP.

  93. Deepak,
    1. You could sell Flat 2 and pay off your Flat 1 – this will not attract any pre-payment penalty for flat 1 if this results in paying it in full. Diff banks have different rules – better check with your bank.
    2. No. Repaying loan is not investing into properties and hence doesn’t get you any tax benefit.
    3. Depends on your goal. Why do you want to sell property 2- is it for settling loan ? Not sure if that is the right approach as long as you have surplus funds to pay your monthly loan installments. You may not be able to escape tax liability and pay off your loan in the same time.

  94. Trupti,
    Prepayments go towards payment of principle amount.

  95. chaya datta says:

    Hello!
    I have taken a home loan for Rs. 33 lakhs from SBI for 15 years. I have made a prepayment of Rs.6 lakhs already. As I have received some salary arrears, I want to repay another 3 lakhs. At present, I am claiming IT exemption of Rs.1,50,000. Is it advisable to repay the amount? will there be any reduction in IT exemption? with the reduced amount will the tenure of the loan get automatically refixed or do I have to give an option. If so, what option should I choose?

  96. Sree says:

    I had taken a housing loan of 31L on 2006 and currently nearly 10 L is pending. Recently(2013) i had started the housing loan on my second property of 38 L. Now i had disbured some property and want to close both loan. Is it advisble to close both or partially close and put the remaining money on investment. My concern here if i close both i may loose my income tax benefits and all.Shall i pay the half amount on second loan and continue with the other? please advice

  97. Chaya,
    Once you repay your loan by another 3 lacs, the annual interest will not be charged by the bank on this amount. This will reduce the amount of interest you pay towards your loan. You will be able to claim tax relief on only actual interest you are being subject to. Hence, your tax exemption may reduce.
    You need to contact your bank on the options they have for you when you pre-pay your loan.

  98. Hi Sree,
    One this is for sure, if you close the accounts, you will not be able to take the rebate of Tax.
    However, the point which you need to assess is – do you have an alternative investment channel which gives you return higher than the next of tax interest rate payouts on your current loan. If yes, don’t repay, else repay it in full.

  99. Hardik says:

    Dear BFA,

    I read your entire blog and almost each of the above Q&A of past one year. It is indeed nice of you reply to each and every person, often at one go when you might view the blog after some interval. I did take a few learnings from your above replies to various queries but still I sincerely hope you will give a reply to my specific situation as well because I am really confused whether to take a Home Loan or not.

    I have just recently booked a 2-BHK flat under their Pre-Launch Offer with a basic price of 16.50 lacs which shall be close to 20 lacs all inclusive on completion. This is bought purely as an investment and I am not likely to stay here. I plan to rent it out when the apartment is ready in about 2 or 2.5 years. And main motive is to sell off after about 10 to 15 years with a good profit. Now, out of this 16.50 lacs price, I have already made a down payment of 2.50 lacs with my savings. For the remaining 14 lacs plus amount, I am confused whether to take a loan or manage the payments gradually from my and my wife’s savings, Company FD’s, PPF withdrawals etc? Because the main advantage is that building construction has just started. So, I have 2 years timeframe approx. where I can arrange cash in some intervals and make entire apartment purchase by way of cash flows from my maturing FD’s in the next 2 years.

    1) Will that be a good option to go for? Because basically this way I will be saving about 6 to 8 lacs (or more) of pure interest amount on a home loan which comes to me at 10.25% ROI.

    2) I understand that tax benefits under 80C and for interest amount are there. But, I seem to get confused whether for such benefits, should I pay a huge amount like 8 lacs just as an interest? This is specially for my case where I am buying home for just investment.

    3) If I look at at it other way, I am earning 10% average interest on various FD’s that I have and 8.50% approx on PPF. And, on other hand, the interest of Home Loan is going to be 10.25%. So, will it be prudent to take a home loan or to pay for new house from the maturing FD’s? Again, the FD interest is taxable as I fall in 20% slab and my wife falls in 10% slab.

    Request you to please guide me whether I opt for a home loan or shall I manage from my own cash flow so that by 2.5 years, when my new home is built, it is entirely debt free on my name.

  100. Hardik,
    Thanks for your appreciation. My thoughts on your queries are :
    1. When you are opting for an investment into real estate, the best is to take advantage of a housing loan which gives you maximum possible leverage. This also helps from tax aspects (80C for principal and interest deductions). This tends to increase your overall returns on your initial investment.
    2. I am not a great fan of breaking existing investments or diverting payouts from existing investments into real estate as it results in diversion of funds from relatively liquid funds into illiquid real estate investments.
    3. These days the developers are not really committed to deliver their projects on time. Hence the best way to rein in your capital payout is going via a home loan. This also helps as the bank performs the basic due diligence before disbursing the loan. You always have the option to pre-pay your loan when you have surplus funds.

    Hence to summarise – you may want to go for a home loan instead of your own funds. Once the property is fully developed, you may consider the pre-payment if situation demands.

  101. Shalini says:

    Hello
    I have taken a home loan of 28 Lakh in 2009 (for a construction link project) in Delhi, so far we have made payments for 23 Lakhs out of which we have only 1 lakh loan with bank and made prepayments for balance, balance 5 lakh demand is expected to come (1.5 Lakh by June 14) (3.5 by Dec 14), 2 yrs back I have moved to Bangalore and living in rent (paying 15K) currently.
    Now I am planning to buy a house here taking bank loan thinking that EMI what I will pay will be an investment to build a house instead of paying dead money in rent, pls confirm if my thought process is correct.

    Thank you :-)

  102. gaurav dasgupta says:

    Need a financial advice from you all. Suppose I am buying a flat for 20 lakhs and I already have the entire 20 lakhs in the form of Fixed Deposits ( which are liquid and have just been created). Does it make sense for me to take a home loan for buying the flat by pledging the fixed deposit as collateral ? Keeping in mind the fact that, on the interest amount, 1.5 lakhs deduction is available for income tax purposes in an financial year, can you please make the computation ?

  103. supriyo says:

    Hi BFA,
    I am having a Home loan for 40 lakhs @10.1%.
    Just want to know will it be beneficial to go for 15 years or 20 years tenure, considering I will be doing prepayment and will maximum close this outstanding debt by 8-10 years.
    Kindly suggest!

  104. Naveen says:

    Hi,

    I had taken a housing loan with HFC on old house about 3.5 years ago. With tenure nearing half way mark and reduced outstanding to 1/3rd with part payments (currently 15L), am planning for a new building at the same plot. When enquired for construction loan options, banker says that the demolition and reconstruction can’t happen until the exisiting loan is cleared. Please suggest is there any option to get housing loan for construction purpose or Will i need to wait until the exisiting loan is cleared?

  105. Pratik Patel says:

    HI

    I was going through this post and just had a quick question.
    I have recently taken a home loan from hdfc bank for rs 700000

    If in next 3 Years I have 700000 Rs Cash Can I walk up to the bank and say take your money and close the loan. I know that they will charge me Prepenalty and I am ok with that . My question was is it really possible that If I have the money then I can pay them back and close my loan.

    Also other option is let say I have a loan of 700000 and I pay 100000 every year towards my principal amount apart from my monthly EMI thus it means that my loan will get over in next 7 year. Is this possible?

  106. Manu says:

    Hello Sir,
    I took a loan FROM SBI max gain in Feb 2013 of amout 41 lacs.
    The interest rate is 10.4% at the moment and is floating. My father is giving me 40 lacs to pay off this loan. My loan is a join loan with my wife and both of us are salaried employees falling in 20% tax bracket.
    Could you please suggest. I am not very keen in invesating in risky options. I always prefer FD for investment.

    Thanks
    Manu

  107. Shalini,
    The EMI which you would be paying in Bangalore may not be equal to you rent payout, perhaps much more than the rent amount. If you can afford the emis without negatively affecting your cashflows, go for it.

  108. Gaurav
    It all depends what other investment options do you have. Interest on FD is taxable and reduces your returns by your tax slab. On the contrary interest on home loan gets you tax advantage.
    It does not make sense to earn after tax interest on FD of around 6% while you are paying out interest on home loan at around 7% after tax. However, if you go the home loan route, you will have the FD amount at your disposal to invest into other investment options should you desire over and above your current property option.

  109. You may consider 20 years option if you want to prepay. This will reduce your monthly emi payouts. You can use this saving to prepay your loan if you don’t have any option to use it gainfully. You can close out your loan any day you desire or even prepay without any penalty.

  110. Naveen
    This is an interesting case. You have two option
    1. Take a temporary loan from your friends and family to pay off your current loan and then go forward with your new loan arrangements
    2. Approach your existing loan provider to get additional funds for construction. Once that is sorted, you can consider options to transfer your loan to any other bank.

  111. Pratik
    You have two options:
    1. You can prepay upto a specific % of your loan each year from your savings without any penalty. If I recollect it correctly it is 25%. Confirm it with your bank. Housing Finance Companies will charge a prepayment penalty.
    2. If you have entire amount in your bank account already, you can settle your loan in full with the bank with no penalty as long as the funds in the bank are from your own savings and not borrowed from other sources. Housing Finance Companies will charge a prepayment penalty though.

  112. Muthu says:

    Hello Sir
    I am holding Housing loan with SBI. The loan amount is 23 Lakes. Now the interest rate is 11.5 %. I have excess amount 5 Lakes in my hand. I am falling in 30 % Tax slab. Wanted to pre closure my loan . wanted your guideline for this

  113. narayanan j says:

    I have 2 home loans , 1 am having a out standing of 11 lacs @ 10.25% and another 46 lacs @10.25%, am taking tax benefit for 2th interest on 2nd house and staying in a rented house, is it wise to prepay around 15 lacs on the above loans or continue the same since have 15 lacs in Fd at rates ranging between 9 to 10%

  114. Birju says:

    Hello Sir, I have SBI Maxgain sanctioned for 25 lacs for an under-construction property. I have used 75% of the sanctioned loan to pay to builder. I will be getting the possession soon but I do not want to use the remaining sanctioned amount right now. If I do not use it now to pay to builder, would I be able to use it in the future when needed ?

  115. Neha says:

    article and supa timely for me as I was looking for some financial advice regarding a home loan balance transfer. I have a home loan from LIC Housing Finance, Loan amount was 23Lac and was taken in Nov 2007 for 20 years at 10.5 % Floating Interest Rate that has now become 12% ( exorbitant I say). After paying EMI for so many years the outstanding Principal is INR 21.32 Lacs still:( Due to the supa hi interest rate I thought of transferring my loan to ICICI which is offering 10.15% interest rate for 2 years n then floating. Should I opt for this transfer or not? I think I should transfer just to save interest payouts. The second advice I need is, I have about INR 3 Lac in my current account and I was thinking for making a prepayment towards Principal amount , should I go ahead and pay in LIC Housing Finance or wait for the transfer to ICICI and then make the payment? Your advice is desperately needed
    I think all your articles are enlightening then why your name is Banyan tree why not Bodhi Tree? Please respond quickly as I have to make a decision in a day or two

  116. Dilip says:

    Dear Sir,

    I have a home loan in indiabulls at 11.0% and search for transfer to other bank and i found is charge is almost 10,000 when i ask to indiabulls they offer me to reduce your interest rate from 11.0% to 10.25% at charge of 5615.So i do and save almost three year.
    Please see difference in below mentioned table.
    Outstanding amount-1437943
    Premium-14643
    Current interest rate-11%
    Tenure in month-253
    After offer
    Current interest rate-10.25%
    Tenure in month-215

    Total save 38 month.

    Sir please guide i do ok or not.

  117. Muthu, similar question has be responded multiple times in this article. Please go through the responses and ask any additional question.

  118. Narayanan, investing in a FD will give you approx the same income compares to loan payouts after tax. You may continue to do this till you are unable to find a better investment option.

  119. Birju
    You may want to clarify this from your bank. As I understand it, in SBI maxgain you can deposit any surplus funds in your bank to save interest payout without prepaying your loan. You can withdraw such excess amount at any time if you need and the loan interest shall start accruing again. It is like an overdraft account secured by your house.

  120. Neha thanks for your appreciation and apologies for the delayed response.

    Firstly you must check from LIC HF if they will charge a prepayment penalty for exit. While the banks do not charge it owing to RBI rules, LIC HF is not a bank.
    If you chose to do so, take a lesser amount of loan from ICICI after prepaying your part balance to LIC. This way it will save you some hassle.

  121. Dilip, if you are okay to pay upto 5.6k charges, you may be better off moving to a bank compared to India Bulls which is a NBFC. You should find out other deals in the market from the banks and see what you can get. The advantage of this is that you may prepay any amount in future to a bank without any charges provided the funds come out from your source of income.

  122. Abisheak says:

    HI,
    I have a home loan with Axis bank and currently the outstanding balance is 27lakhs.In a few months,i will have enough cash to complete paying the entire home loan.I had taken this home loan in 2008 december.
    I am confused as to whether i should prepay the entire home loan or should i invest the amount in buying a second flat and giving the second flat out on rent?
    Kindly advice.

  123. P V Reddy says:

    Hi Banyan, Very Good Article and Info. that you are providing us.. Sincerely Appreciate. Please guide me on the following –

    I fall under 20% Tax bracket. I have a Composite loan(for plot and construction of house) of 22 Lac on Tranche based EMI of which 12 L is released for purchase of my plot and I started paying EMI of nearly 13K (from LICHFL at 10% Fixed interest rate for 3 yrs and floating after that, for a tenure of 15 yrs) The rule is that I need to start constructing the house in the first 2 yrs as I take the loan.

    I was told that, in case of not being able to constructiing my house in 2 yrs, I may convert this composite loan into pure plot loan by reducing the tenure to 10 yrs from 15 yrs (not sure on the changes in the interest rate).I was also told that, I can prepay the load anytime after 6 months of start of EMI and it should not be be prepay-ed by means of taking another loan.

    I am investing 15K every month in SIP on a portfolio of 5 MFs since 2 yrs with a current returns of about 28% cos of good will created through Modi as PM etc.

    My Question is –

    I am getting support of nearly 4 L from family sources and 5 L if I close my SIP so together I can accumulate 9 L and if I can prepay my loan .. I can save majorly or interest for my EMI. At the same time I some how do not wish to discontinue my SIP as I started that keeping in mind to build a long term corpus fund for future. But at the same time.. I can restart my new SIP after I will be left with paying EMI only for 3 L (12 L – 9 L) and the rest I could afford to start my new SIP again.

    1. One way of looking at it is – I can redirect my loan EMI paying huge interest – to start a new SIP investments.. by prepaying 9 L OR

    2. Is it good to continue my SIP and reap on high benefits of enjoying compound interest which could be more than the EMI that I pay?

    1st one sounds good for me.. Please guide..

    Also please guide on the points that I should keep in mind while I prepay my Loan.

    I know its bit long but plz help.. very much appreciated!!!

    Best Regards,
    Reddy P V

  124. SS says:

    With the interest/principal exemption on HLs increased in the current budget, does it still make sense to prepay the HL. For somebody who has 15L as housing loan with 5 years to go @ around 10%.p.a.

    Any insight here would help.

  125. Hi Abhishek
    I would go for the second option.

  126. Hi Mr. Reddy,
    The loan amount you are talking about is not massive and it does not make sense to repay the loan by killing your SIPs and taking loans from other family members. Remember that the amount you pay towards the loan will get stuck in an illiquid investment which you can not tap in case you need funds on an urgent basis.
    Properties have an edge over mutual funds – they can be invested with leverage of a loan to get a big bang for your money. But if you prepay a loan,you are removing that leverage and it would reduce the attractiveness of your property investments.

    If I was you, I would have continued to pay the EMIs (they are good from tax purposes as well) and invest into SIPs as you already do.

  127. Dear SS,
    With increased exemptions in the current budget, it adds another incentive to continue to pay housing loan EMIs as it further reduces the impact of interest payouts after tax impact. You can claim additional 50K of interest payouts (in case of self occupied properties) and another 50K of principal payouts towards 80C investments. This in total can save upto Rs. 30K of tax annually.

  128. Gopinath says:

    Hi,

    Is there any penalty or limitations(No of times re-payment) associated with partial repayment of SBI home loan ?

    I have taken 20Lakhs from SBI on Oct2011 and i am planning to repay 3lakhs now. and later some amount every year …

  129. Hi Gopinath
    My understanding is that there would be no penalty. Please double confirm it from your bank on the terms and conditions.

  130. Shahul Hameed says:

    Hi

    I am earning nearly 65K per month in IT. I pay 10K rent and I plan to buy a house for 38L. For 30L I want to go for Housing loan. I never take any loan in my life. (I dont any source or property as of now) I am feared that in Future, If I lose job, it would screw me up. Could u advice me what I can do?

  131. Pratyush says:

    Hi BFA,

    A brilliant article to say the least!! Your article covers almost every aspect of home loan and literally leaves no question unanswered. However, thanks to my inquisitive mind and me applying for home loan for the first time, I have a few ques, which are:

    A) Instead of part payment, is it prudent to opt to increase the EMI amount? Say for exp, 30K to 35K in order to finish off the loan a bit earlier.

    B) I have availed a vehicle loan for which I pay Rs 8500 as EMI. Will that be accounted for as deduction while calculating my eligibility?

    C) Considering prevailing home loan options and RBI policies, which option is better- fixed rate or floating rate?

  132. Yazeer says:

    Hi Sir,

    I would like to sell my property in order to close by housing loan. Whats the best way to approach this. Can I talk to the bank people or shall I deal direct with brokers.

  133. Shahul
    I can appreciate your fear which is common when you go for a first massive investments and undertake a liability in the form of a loan.

    The risks are always there. You need to evaluate your own situation and check the probability of them occurring with you.

  134. sekar says:

    A very informative article.Thanks for your enormus guidance , even though i am just a reader.

  135. Pratyush
    Thanks for your appreciations. My responses are below
    A. Part payment is more beneficial than increased EMI as it keeps your monthly cash outflow under check and gives you the flexibility to make part payments if your funds are still idle.
    B. Yes
    C. Floating may be better considering the interest rates may not go far from here northwards.

  136. Yazeer,
    Your property will not be sold by the bank. You will need to get help of real estate brokers.

  137. Sucheta says:

    Is simple interest is applicable on loan balance when I do the part prepayment. I have hdfc home loan and when I go for prepayment on 5 or 10 the day of the month they charge simple interest on loan balance. But on 1st day no interest is charged.
    I made prepayment on 19th Sep, they charged simple interest of 18days.
    Please suggest what this simple interest means and why they charge as I’m doing part prepayment.

  138. Abby says:

    Dear BFA,

    this is an awesome peice of information indeed. thanks!!

    I had a question, may be I would divide it into parts:

    1) I have a Max gain loan of 25L for 20 yr (July 2012) @ 10.5 floating rate of interest.
    2) I have an FD of 9L @ 9.5% int, qtrly int payout
    3) Savings of 2L

    Would I benefit if I transfer the FD and savings to MG account? Currently I am at 20% tax slab. If Yes – How? if No – Why?

    please let me know if you need further information.

    Regards,
    Abby

  139. kiran says:

    Hi !
    I want to go for home loan of Rs 15 lacs. I have got a salary of 60000 INR per month. which banks should i lend on ICICI,HDFCor SBI? & What are the precautions i do have to take before going ahead?

  140. Prasad says:

    I have a pending loan amount of around 8.4 lacs (EMI 26,020, remaining tenure around 3 yrs) in loan 1 and I have taken a new loan (taken 10 months back for 20 yrs) which is for 40 lacs and having an EMI of 38,756/-. I expect an incoming amount of around 4 lacs in next couple of months. Question is which loan should I pay this amount to?

    I believe it is better to pay for the new loan as I would end up paying more interest on this on now. Please suggest

  141. Sucheta,
    Banks charge interest on a daily basis on the outstanding principal amount at the end of the day. The interest amount so calculated is debited into your account on month end. Hence if you pre-pay on 1st, no interest is charged and any pre-payment before month-end will get simple interest. Once you pre-pay, the principal amount gets reduced from that day onwards and interest is calculated on the reduced principal amount from that day.

  142. Abby,
    Thanks for your appreciation.
    At 20% slab, you can use upto 2.5 lacs interest towards your salary deduction provided you are living in it and full amount if it is rented out. Assuming you are living in it, your approx interest rate comes down from 10.5% to 8.4% owing to tax rebate. Contrary to it, your FD after tax comes out to 7.6%.

    Definitely it will make sense to move your savings to MG, excluding some emergency fund for ready access. FD, if you have booked it recently, you may want to shift it to MG.
    Contact your banker and he will tell you how. It should be a simple breaking of FD and transferring the amount by cheque to MG account.

  143. Kiran,
    I would say all banks are good and regulated – go for the cheapest. It is more for the banks to choose whom they can lend as their money is at risk. However, amongst all the banks, SBI has a product called Maxgain which allows you to withdraw the funds which you have pre-paid to the bank. This essentially provides you the flexibility to avoid paying interest on your idle funds which can be parked in your loan account and hence providing you tax free 10% returns.

  144. Prasad,
    While your thought process is correct, let me add another dimension to it. Pre-paying of bigger loan first will reduce its EMIs to a more manageable levels. As you would appreciate, the banks don’t accept part payment of an EMI, e.g. you can’t pay 20K instead of 38.7K to the bank in case you are short of funds in a particular month. In such a case, if the EMI size is small, you are better prepared to withstand the short term cash crunch compared to a loan with a bigger EMI.

  145. VIKAS says:

    My two cents. Make sure you take loan from the bank which has an option to go back to the interest rates being offered to new customers. I have a home loan with LIC running with LIC at 12%, while LIC is (or was) offering new customers for around 10%. It would have been great to change my ROI to 10% by paying some amount (normally 0.5 -1% of the total outstanding principal). BUT, sadly LIC does not has this option, but HDFC, ICICI and AXIS (not sure about AXIS) has. I would recommend going with these. Moreover, LIC is a big pain in the neck, for anything you need to run to their Asaf Ali Road branch in Delhi.

  146. Aswin says:

    which bank is best for prepayment option, i mean flexible. few banks ask for minimum of 3 months emi, I want to pay the cash as and such when i have money. should be competitive in interest too

  147. Ashwin,
    Try exploring options such SBI’s MaxGain account where you can deposit any surplus money in your loan overdraft account and have the flexibility to withdraw that money again in future.

  148. Nitin says:

    Dear Sir,I have taken loan HL from ICICI bank in year 2012 with 10.5 % ROI. Present ROI is 10.75% and outstanding amount is 18.75Lacs.I am planning to do prepayment of around 9 Lacs by withdrawing LICs and some ULIPs. Further I am planning to shift this loan to SBI Max Gain which is having present ROI 10.1%. Seek your inputs for the following questions:
    1.Will it be good option to withdraw LICs and ULIPs (considering I will take some term insurance Plan to cover the risk)?
    2.Will it be good option to go for SBI Max gain after prepayment of 9 Lac in ICICI or shall I kept this 9 Lacs in SBI Max gain and try to reduce the EMI or Loan tenure.
    3.I am coming under income tax Slab of 20 % so will above exercise will increase my tax liability , if yes what will be the tentative prepayment of loan should I do ?
    4.My planning is to reduce the loan liability and divert this fund to some SIPs in mutual fund will it be good option pls. guide

  149. tim says:

    Hi i took a home loan from HDFC last month of 20 lac , 360 months, can i start my prepayments now without fine?

  150. Tim,
    You can definitely make pre-payments without fines.

  151. NuRuposh says:

    Hi BFA,

    It’s very important information your shared with us. Thank you so much for this help.

    Question : I have home loan ( 16 LAC) for 20 years (Nov 2011) having EMI 16K , and recently I have purchase New home (19 LAC) having EMI 19K for 20 years ( Nov 2014), I will get my possession of second home in March-2015. 2nd flat I suppose to put it on rent 8 to 9 K per month. My question over here , Which HOME load Should I start to re-Pay.?

    I am 30% tax bracket. Please advice

  152. Nitin
    You have excellent queries which I will try to answer at a high level
    The only advantage of your LIC and ULIPs is insurance cover. Before redeeming them, please take a reasonable risk cover from a Term Insurance. Once that is done, you may redeem it.
    You should transfer the complete loan to SBI max gain as it is cheaper and also flexible. You must then credit your LIC proceeds into the Max Gain account. Do not prepay your ICICI loan account directly. This will give you a flexibility to draw loan in future from Max Gain.

    Your tax liability will increase by prepayment. However it is better to invest the savings into Mutual Funds.

  153. NuRuposh says:

    ###One more thing I want to add in previous post.###

    Hi BFA,

    It’s very important information your shared with us. Thank you so much for this help.

    Question : I have home loan ( 16 LAC) for 20 years (Nov 2011) having EMI 16K , and recently I have purchase New home (19 LAC) having EMI 19K for 20 years ( Nov 2014), I will get my possession of second home in March-2015. 2nd flat I suppose to put it on rent 8 to 9 K per month.
    I have car loan as well of 4 LAC (started dec-2013—> for 7 years) having EMI 7K per month

    My question over here ,

    1) While loan should I start to re-pay, 1st home / 2nd home / Car loan.

    Please guide me best for this case.

    I am 30% tax bracket. Please advice

  154. Mark says:

    Hello BFA

    I have a question and would appreciate your advice. I have a home loan at 10.25% with HDFC and the total outstanding as on date is INR 1800000.00. I have a fixed monthly EMI of INR 40000.00 and the total balance tenure of the loan is around 52 months.

    I view of the stock market doing well , i have a few Mutual Funds which have been providing good returns.

    I would need your advice on which of the following options would be a good bet. I am in the 30% tax bracket and the tax exemption that i receive is INR 61800.00 P.A.

    Option 1 – Liquidate MF’s to the extent of INR 1800000.00 and pre-pay the loan. Invest the INR 40000.00 (which would now be released for investment) in MF’s again.

    Option 2 – Continue paying the loan for the next 5 years and continue to earn on the MF’s which would not be redeemed.

    I am confused on which of the above options would be the best choice.

    Do advice.

    Regards

    Mark.

  155. Abhishek says:

    Hello BFA,

    First of I would like to thank and appreciate your promptness in replying to every single query posted on this blog,

    I am buying a house cost is 21,00,000 (cost) + 1,75,000 (Development & Soceity Charges) + 1,60,000 registration.

    Now the builder is ready to make an agreement for 17,00,000 and remaining amount he wants me to pay it in cash (black)

    Below is the break up:

    Total Cost: 24,37,000
    Agreement Value: 17,00,000
    Loan Amount (90%): 15,30,000
    Cheque Payment (10%): 1,70,000

    Total: 24,37,000

    Short of Cash by around 3,00,000

    So my question, the cash part that I am falling short of, can I avail a top loan along with the loan application?

    So the loan acount would become 18,30,000 and I can payt the builder his cash part?

    If yes, then which banks offer top up loans along with fresh applications?

    Any advice would be of great help.

    Thanks and Regards,

    Abhishek

  156. Hi NuRoposh,
    I would think that repaying the old loan will make more sense than the new loan. Rationale – interest on new loan can be used for tax deductions after the possession. In addition, if you would be planning to put your second flat on rent, the entire interest expenses can be claimed as tax deduction.

  157. NuRuposh,
    If repayment of car loan does not attract pre-payment penalty, you may go for its repayment first.

  158. yatish says:

    Hi,
    I am planning to buy a flat in Bangalore for close to 46 lakhs, planning to go through SBI or LIC. I have a couple of queries, although they are very basic i assume.

    1. I am aware that there is no more a pre-payment amount if i want to close the loan at any point of time, but do we have a “locking” period?i mean is there a minimum amount of years beyond which ONLY i can go for prepayment.

    2. I am a bit confused on how does this pre-payment concept work, can you please illustrate with an example.

    3. Since i belong to the 30% tax bracket, what tax benefits can i get and how do i calculate this?

    I would really appreciate if you could reply on this.

  159. Mark
    Option 2 looks better to me. Being in 30% tax bracket, your cost of loan will be reduced by the amount of tax exemption on interest. By any standards, your mutual funds (Equity) would be giving you 15% plus returns. It makes very limited sense to sell your growing asset to pay of your loans. Mutual funds are extremely liquid assets and could help you to weather of any emergencies should they arise. If you transfer your funds towards repaying your home loan, your liquidity will also get hampered.

  160. Abhishek,
    It is a sad story in India where builders expect cash towards the payments. Unfortunately banks will not finance your cash component. Your limited choice is to have an unsecured personal loan, that will hit you with over 15% interest. once you get the loan, you can withdraw in cash and pay the builder. However, then you will be under the radar of Income Tax Dept who may pull your case in scrutiny for withdrawing 3 lacs cash from your bank account.

  161. Yatish,
    You may double confirm with the bank, but as per my understanding there is no prepayment penalty, no minimum amount and no minimum tenure before you can prepay. The only requirement is that the prepayment funds should be from your own source, i.e. you can not borrow the funds from your friends / families and pay.

    If you prepay, the amount of prepayment reduces the outstanding principal. For example,if you take a loan of 30 lacs and prepay 10 lacs, your loan amount reduces to 20 lacs. As a result, the interest computed on your loan will reduce as the principal has reduced. This could have a direct impact on your tax benefit as interest on home loan is allowed as a tax rebate.

  162. pradeep says:

    Dear BFA,
    I am planning to do the part prepayment for my home loan quarterly by my savings, chit funds and borrowing some fund from our friends and relative’s via cash and remit for home loan,(to clearing loan amount as earliest) I would like to know for prepayment there is any restriction in above said options of fund source.

    pls advice

  163. ashok kumar says:

    Hi, sir, I want Homeloan 5 lakh from SBI or PNB bank and want to pay in three year it is possible or not my monthly income is 25 thousand.

  164. saravanan says:

    Hi,
    I have taken a loan of 21.5 lacs from lichfl in jan 2012, interest rate is 10.3% and tenure is 15 years and monthly emi is 24000. Now i want to finish the loan by 2020. which is the best option, (i). Increasing emi by 5000 monthly (ii) part payment.

  165. Jagrut says:

    Hi.. I have purchased a flat on Baroda, Gujarat. I have take home loan of 20L for 20 Yrs @ 10.45% from HDFC. Wanted the advice that how much would be impact on the EMIs if i repay the loan around 2L?? Are there any such calculators available?

  166. Anil Mathew says:

    Sir,

    I got a home loan with ICICI bank for 35 lakhs @ 11% interest now. I am an NRI and do not pay any taxes do not get any rebate. I have take this loan for 5 years and has got 20 installments remaining. Is this wise to prepay the balance and close my loan. To pay this loan i have to break my FD’s which generates only 9% interest, Please advise.

  167. Sathya says:

    Hello Sir,

    Thanks for your very good article, which helped me to understand very much.

    I took Loan from LIC in 2013 for 20Lacs and with the tenure of 25 Years.
    Now my principle left is 19.60Lacs after 2 years(sad).

    Now am going to move to Floating which will charge me around 12%.

    I can afford for pre-payment of 2 Lac.

    a) Shall get a chance to increase my EMI, which will reduce my tenure when i am converting to Floating rate..?
    b) Could you please suggest the Options of reducing my Tenure by making part payments at right time ?
    c) Is it a good option to transfer my Loan to other Banks which will offer lower interest rates ?
    d) Will there be any time limit, to transfer the loan after part payment with LIC ?

    Thanks again for your tips to save the Interest part, really i was not aware of the Fact when i opted for Max tenure.
    I was in a impression that, we will do a part payment / pre-closure, but instead by making small payment change (which you illustrated) will make the big difference..

    Thanks,
    Sathya.

  168. Pradeep
    There is no prepayment penalty on home loans as long as the prepayment is from your own sources. The bank will not consider prepayment of funds borrowed from relatives or friends and may charge a prepayment penalty. Better to get this also confirmed from the bank.

  169. Sundar says:

    My query : I have a HL of 15L with 50 EMIs pending.I plan to prepay a substantial sum 1.5L out of my earnings every year to reduce the HL so that it gets completed within 2016/2017 since my idea is to go for another property.

    The confusion here is to whether to prepay on a periodical basis or invest the said amount elsewhere (MFs/stocks ..which look good for the next 2-3 years) and then pump in the proceedings from there and close this loan for good.

    I am in the 30% bracket. Any suggestions would be of great help.

  170. Ashok,
    I don’t think you should face a problem. But just having an income of that level is not a sole factor. Loan depends upon multiple other factors like existing loans, previous credit history, etc.

  171. Saravanan,
    If you have surplus cash as of now, you may want to make a part payment today. For remaining 5K per month, you may invest it in Equity SIPs for the remaining duration and use the proceeds in 2020 to repay your balance loan.

  172. Anil
    If you will break your FDs now, you will not get the same interest rates should you want to open new FDs. I would suggest you to prepay with some other sources. You still have the option to claim tax rebates on interest paid on home loan. If your property is on rent, you should file tax returns and claim interest as deduction. This may even give you the opportunity to submit returns with losses which can be set off against future incomes.

  173. Sathya
    You should definitely explore the option of transferring your loan to another bank. By current interest rates, you may get a loan which would be cheaper by approx 1.5%. I would suggest not to reduce your tenure as it will increase your monthly emi which will impact your cash flows. Instead, you may prepay the loan on a regular basis if you dont have any other investment option or cash needs say by end of a half year. By this way you will have the flexibility to prepay as well as keep your mandatory monthly cash outflows under control. Please check with LIC on their terms for transfer of a loan.

  174. prabal says:

    i have taken 13 lacs loan from lic HFL before 9 months. I m paying 12995 EMI. I want to pay the whole amount now. What will be the process and what will be the charges i will have to pay. can i sell the property with out prior permission of LIC HFL .

  175. Sathya
    You should definitely explore the option of transferring your loan to another bank. By current interest rates, you may get a loan which would be cheaper by approx 1.5%. I would suggest not to reduce your tenure as it will increase your monthly emi which will impact your cash flows. Instead, you may prepay the loan on a regular basis if you dont have any other investment option or cash needs say by end of a half year. Please check with LIC on their terms for transfer of a loan.

  176. Sundar
    If your objective is to prepay and then buy another property, then it makes very little sense to prepay and then again take a loam after a few years. Instead, buy mutual funds for the amount you want to prepay and redeem them towards the deposit for next property.
    If you put the current property on rent, you can claim entire interest as rebate towards reducing your taxable income

  177. Prabal
    You can prepay the loan without any charges. There may be a prepayment penalty if your loan was with a fixed interest component. Pls check with LIC HFL for this.

    You will not be able to sell the property as the property documents would be with LIC.

  178. Santhosh M says:

    Hi,
    I want to take a home loan to construct the home in my own land, I need 15lacks for this and I can pay 20000 rupees as EMI. I am in a huge confusion to choose the bank to apply for a loan. Whether it is best to go with LIC HFL, or govt assoicate bank SBI or any other private banks (HDFC, AXIS, ICICI etc). Could you please suggest on this.

    Thanks in Advance!

    Regards,
    Santhosh M.

  179. Jijo says:

    Hello Sir
    I have taken Home Loan from HDFC on June 2014 – 20 Lacs @10.25% for 20 Years.. and my EMI was 19000.. Then i increase my EMI and make it 29000 and years came down to 8.6 years… Now i have 1.2 lac saving should i do the Prepayment or wait for the Govt budget? My salary is 56000… I am also investing 7000 in 4 mutual funds…
    kindly advice after doing prepayment i will have 40000 thousand in hand for any emergency…

  180. Pankaj Singh says:

    Great work sir, I wanted one advice from you. I am an NRI person and thinking to settle in India in next 2-3 months. For that reason I’m thinking to apply for home loan. Which are the mandatory documents to apply for home loan in India.

  181. Santhosh
    You may avoid a HFL company and choose a bank. The reason- the cost of borrowing for a bank is cheaper and hence they are more likely to provide you a better deal. You may try SBI, HDFC and ICICI in the order of priority.

  182. Hi Jijo
    Apologies as this response may not come timely. You may want to increase your monthly mutual fund investments instead of prepaying as over next 5-10 years, they are more likely to provide you enhanced returns than saving interest by doing a prepayment of loan.

  183. Sundar says:

    Thanks for the reply….The HL that i am intending to close is of my first house which i reside in…..that being the case…taking into account all the prepayment parameters into consideration (tax rebate for interest,lesser take home etc..), will it be advisable to keep this loan to a minimum (say 5 lakhs) and then go for the second HL…?

    –Sundar–

    Banyan Financial Advisors says:
    February 13, 2015 at 2:03 pm

    Sundar
    If your objective is to prepay and then buy another property, then it makes very little sense to prepay and then again take a loam after a few years. Instead, buy mutual funds for the amount you want to prepay and redeem them towards the deposit for next property.
    If you put the current property on rent, you can claim entire interest as rebate towards reducing your taxable income

  184. tilak says:

    Excellent write-ups and comments. Currently have two existing loans of 5 and 12 lacs with a capability of additional outflow. To maximize the tax benefits will you suggest to sell one home and invest in a higher value home and subsequent higher EMI?

  185. Tilak,
    The cost of selling a home and buying a home comes upto 10%. Just taking another loan owing to free cashflows does not look like a good option to me. If you have more outflows, you may want to invest into Equity Mutual Fund SIPs. That may give you similar returns like that of Real Estate.

  186. Shinu says:

    I have taken SBI jeevan raksha Insurance (premium of 50000rs) against the Home loan of 20 Lakhs and tenure is 10 years. i have closed the loan account in 54 Installments against 120 installments. Do you think i will get any money back on the Insurance premium for me to apply for the refund of premium?

  187. kanth says:

    Hi,

    Please advise me, Is it good to transfer the home loan of 12,00,000 from LIC HFL (10.95% fixed for 10yrs interest rate) to SBI (9.85% floating)?

    Loan tenure 25 yrs in which 2.6 years completed.

    Is it beneficial if I close my loan in 5 or 10 yrs? (inclusive of all charges by both SBI and LIC)

    Kanth.

  188. Santosh says:

    TATA Capital is offering home loan as below & I am planing to take a loan .
    1) 9.8 % fixed for 7 yr
    2) 9.95 % floating
    Kindly confirm which one to opt as there are news that the rates will drop further .(I can wait for 1 more month)

  189. Hi Shinu,
    I don’t think SBI will refund you the premium. However, it doesn’t harm to discuss this with them. Please do leave your response after you talk to SBI.

  190. Hi Kanth,
    It makes sense to transfer a loan to SBI considering the interest rate differential is around 1%. This will make an interest difference of about Rs. 12K. SBI may charge you around 10K for loan processing charges. You shall still save on the interest rates from next year onwards.

  191. Santosh,
    You should go for floating rate interest as it is expected that the rates should fall. Having 9.8% fixed for 7 year may not be the right decision if the interest rates drop by several % in next 7 years.

  192. Deepak Choudhary says:

    Dear Experts, I have HDFC housing loan of amount 2350000. I took it couple of years above and 196 EMI are still to go. Current Rate of Interest is 10.55% which i am planning to reduce to 9.9% by paying a fee of 6250 Rupees.

    I also have a car lone taken last year in Feb month @ 10.95%. 46 EMI are left. I have some surplus money and wants a suggestion that whether i proceed for Principle payout of my housing loan or i finish my car loan first. I am in dilemma since past few months. Please help.

  193. raghu says:

    Hello,
    I took a homeloan from sbi for 21.5Lakhs in 2006 for a property. Have been paying EMI’s so far and recently SBI sent me a notice stating that all my EMIs have gone towards interest and only 1lakh towards principal. Also, the property is under dispute now due to the original landowner. So how do i ensure that i dont pay SBI any more money or how to resolve this?

  194. Suggestions Bank Loans Pros And Cons | Money and Finance says:

    […] Pros and Cons of Home Loan … – Dear Sir. Thanks for your article. Pl. advise me, Is it a good to swap the housing loan from IDBI bank (10.75% floating interest rate) to SBI (10.25%)?

  195. Hi Deepak
    If you do not have any gainful use of your funds, then it is a good idea to repay your loan. Repaying car loan first may be better as it has a higher interest rate and you don’t enjoy any tax relief like housing loan.

  196. Raghu
    We can not advise you on non payment of your loan to SBI. It may be true that majority of your payments would have gone towards interest and it is only towards the later part of the loan tenure that a person pays off greater portion of principal.

    You should reach out to SBI and take their assistance on the checks performed by them on the property and see if they can help. If you don’t pay the loan, then you may be denied of any loans in future by most of the banks in India as you will be marked as a defaulter by SBI in your CIBIL credit file.

  197. Hi,
    You may have to compute the overall savings after looking into the processing charges levied by SBI. Perhaps IDBI may also follow the suit to reduce the interest and you may find that after going through the hassle to move the loan, you ended up saving pea-nuts.

  198. Arjun says:

    I have taken loan of 23L from PNB with 10.6 floating for 10 years in Jul 2012 EMI 30790.
    I made partial payments and now the balance principal is 12L. I have another 45 months left. Will that be fine if i pay all amount and close the loan or I can continue to pay the emi as now 21k going for principal . I am not planning for another new house or any investment, mine and my wife annual income would be 15L.

  199. sarvesh says:

    Hello and thank you for a nice article. I have following questions.
    Does it matter when we start prepaying the loan?
    I have a SBI home load of 60 lacks. My EMI is 60k. I wish to pay few extra lacks every quarter. Would this extra money go to paying interest or principle?

    Thank you

  200. Arjun
    If you don’t have any other investment option, you could close your loan. Alternatively, you could continue to pay emis and invest 12L let’s say in equity mutual funds via STP route. Please contact us if you need help to get that setup for you. I believe over 5 years, the returns from Equity Mutual funds should be more than the after tax loan cost.

  201. Sarvesh
    Any prepayment goes towards paying off principal. You can prepay at any time, more when you have surplus funds and you don’t have an investment option for it. Alternatively you could invest in mutual funds via sips over the tenure of the loan. That would probably save you money.

  202. Sarvesh
    Any prepayment goes towards paying off principal. You can prepay at any time, more when you have surplus funds and you don’t have an investment option for it. Alternatively you could invest in mutual funds via sips over the tenure of the loan. That would probably save you money in long term over prepayment of loan.

  203. sarvesh says:

    Thank you very much for the advice.

  204. Arunprasad says:

    HI, I have taken home loan from LIC HFL last year Rs:17lakhs(20years) – 2 years fixed and next 18 years floating since that was the norms as per LIC . Now i planned to transfer my loan to HDFC becuase i am getting additional top up amount of 6 lakhs. Now my query is i have a outstanding amount of 17lakhs which i got cheque from HDFC bank but LICHFL is requesting to pay 2% pre clousre interest and service charges

    Kindly advise is this is appilicalble ?

    Thanks/Arun

  205. Insurance for home loan says:

    Thanks for the post it’s really helpful to lots of people which are confused to Home loan prepayment.

  206. Vivek says:

    Good Article.

    I have taken home loan of 30L for 15 year tenure in 2012,current outstanding will be 23L with 3 years complete of EMI. I was paying 1L part payment for every year to reduce my tenure. I have planned to close my loan over of 3 to 4 years from now by paying part payment every 3 months. So I can save around 65% of total interest of tenure period.
    whether I can do like this or Shall I invest in any other properties.

    Note:
    1. Am already started to Investing in Mutual fund(60K), Insurance(80K), PPF(60K), child education(70K) P.A for past 2 years.

  207. SubramanyamCA says:

    I’ve a home loan of 24.5L principal still due with Axis bank at 10.10% Floating interest. I’m looking at settling home loan completely and feel completely debt free in my life.

    While one demerit of doing this would be about losing the tax rebate.

    My income comes under 30% tax bracket and if I settle home loan which makes me completely debt free – what options stay ahead for me to reduce tax with no loans on my name?

    I want to move away from the habit of taking debts and want to identify ways to reduce tax being under 30% tax bracket. Thanks.

  208. Hi Arunprasad,
    I believe that pre-payment penalty has been taken away for Housing Finance Companies as well. You should follow LIC’s official complaint process to get more clarity on this.

  209. Vivek,
    Your query needs a deeper discussion and advise which may not be easy to respond on this note. Can you please reach us at info@banyanfa.com ? Thanks

  210. Hi Subramanyam,
    There is no alternative to replace the tax rebate on housing loan interest as it is over and above the available tax rebates available to salaried employees. However, you may want to see if your other incomes from investments are invested in tax efficient investments to prevent them being subject to 30% tax. Please reach us at info@banyanfa.com for a discussion around this topic.

  211. nlesh says:

    Dear Sir,
    I have two property one is without loan bought in the 2009 and other purchased with loan in year 2014.
    I m planning to sell first property and thinking to square off housing loan of secosnd property.
    Pl advice will it help me ….
    thanks and regards
    nilesh

  212. Hi Nilesh,
    There is a no simple answer to it. Repaying of loan will definitely reduce your monthly loan payments, but will reduce the leverage which you have over the second property. It is always easy to sell a property, but a difficult decision to buy. Just repaying of a loan doesn’t look like a sound option.

  213. Kapil Agrawal says:

    Hello,

    Whether the charges incurred on prepayment of loan (Car / home etc.) are allowed under Income Tax Act ??

    If yes, then under which section / head ?

  214. Nagarajan says:

    My housing loan amount in LIC is 47,20,000 taken on March month 2015.
    interest rate is 10.10 percent….
    For 15 Years……
    Amount payable every month is 51133.00

    after six months is it good to pay a lump sum amount and reduce the total amount payable or not ???

  215. Kapil,
    It depends upon upon case by case basis. Home loan prepayment charges should not be allowable. Car loan charges could be if your car loan is chargeable under business and profession.

  216. Nagarajan,
    There is no good or bad response on this query. If you have surplus funds which don’t have an avenue for other investments, then you may rather pay it off. However, other option is to invest in mutual funds via SIPs and after 5-10 years, you could beating the interest on loan by a big margin. For example, SIPs may earn you over 15% and your interest on loan could be in range of 7-8% after tax impact over the duration of 5-10 years.

  217. CVR says:

    I am planning to by a apartment, its market value is 30L. I am buying it at 20L but getting it registered at 14L.

    Will this be any problem for me from IT point of view.

    Please advise

  218. CVR,
    What you are asking is not legal. We can’t advise anything on this topic. By registering a property purchased for 20 lacs at 14L, you are not paying stamp duty charges. Whilst this may be a prevalent practise in real estate transactions, we don’t endorse it and advise on it.

  219. KP says:

    Sir,
    I have a 15 yr Home Loan @ 10% p.a.(fixed), onwards October 2006 with an EMI of Rs. 7760/- p.m. and no prepayment charge on lumpsum payment.

    I seek your valuable advise as to what will be the ideal amount payable at one go to bring down the EMI to about it’s half and also save money.

    Thanks,
    KP

  220. KP,
    I would say that a better option would be invest the amount which you have for pre-payment in a mutual fund with a tenure of say 5-7 years. Put the lumpsum in a Liquid fund and STP into an equity fund over a period 1-2 years. After 5-7 years you may realise that the returns on the mutual funds may be higher than the interest you would have saved by pre-paying your loan.
    You can reach out to us if you want this to be done for you.

  221. Sachin Arun Dahake says:

    Dear Sir,
    I have two home loans IDBI (principal pending 9.2 lacs @10.0% with tenure 64 months) & SBI Maxgain 11.74 lacs @ 9.95% tenure 180 months.I wants to know whether i shall close IDBI loan or try to reduce SBI to substantial level.
    Last we when i had paid online repayment of 20,000 INR 9700 was deducted as interest out of this amount/ I don’t understand this transaction. (The reason given is Transaction limit crossed. I had paid 2 lacs this year.).
    Need your suggestion.Regards,
    Sachin Dahake

  222. J Ram says:

    SIr,
    I took house loan 40 lakhs from LICHFC in November 2014 with interested rate of 10.10% for 20 years period. Now i am planning to sell my house as i need urgent money.
    Please tell me the how i can close my housing loan.

    Thanks,
    JR

  223. AB says:

    hi, I would like to buy two houses for 23 L and 50 L. I have loan approved from SBI for 23 L. I have 15 L in hand. Is it advisable to go for full payment for 23 (which i can arrange from my family) and pledge the document with bank for initial payment of the 50 L building or is it advisable to pay 15 as initial payment for both the building and go rest with loan. If i go with 23 L for loan, will i be allowed to close my loan in 3 to 6 months without any penalty or other charges.

  224. amitava banerji says:

    Hi, I have two loans for which I pay EMI @Rs.14155/-pm for my house and Rs.13240/- pm for my car. Both will continue for the next 34 months. I have the option to close the loans by paying off Rs.309226/- to close my houing loan and Rs. 476640/- to close my car loan. Is it more profitable for me to continue paying the EMI for both or break a couple of on-going FDs and clear off the two loans so that I can save the EMIs which is draining my pocket every month?

  225. Hi Sachin,
    Since you have a Max Gain account with SBI, I would suggest you to park any surplus fund in that account. It will both result in reduced interest being charged to you plus giving a flexibility to draw down on the loan in future if there is any requirements. If you really need to prepay your loan, you could pre-pay IDBI one first upto the maximum yearly allowed limit and balance you and park in SBI maxgain. I hope this answers your query.

  226. Hi JR,
    Once you have sold your property, you can clear your loan amount with the proceeds received from the buyer. Exact procedure will be told to you by LICHFC. They may charge a prepayment penalty though, but check it with them.

  227. HI Amitava,
    If you need to close your loan account, then you should first close the one which is more expensive. You need consider pre-payment penalty before closing it. You may be better off to close your vehicle loan as the interest from home loan may be used towards tax rebates. FD interest rates after taxes may be less than the payout which you would be making on the loan account. So it may be worth a thought, however, if your FDs are made for a longer duration and have locked in a higher rate of interest for a couple of years, then you may avoid doing that.

  228. GS says:

    Hi sir,

    I have a home loan taken on march 2013 for Rs.20,70,000 with a floating interest rate of 10.5. Per month and I was paying Rs.20,530. But past 3 months the interest rate has been increased by 3% and I am paying Rs.21600 pm now.

    I would like to close the loan within another 6 years. I am right now in a position to save at least Rs.10000 per month even after paying the monthly EMI. Can you please advice on how to go ahead, whether to increase per month EMI or save the amount for bulk deposit per year or investing in mutual fund etc.

    If Mutual fund can u please give some good clarity on options? Like policy name to check in internet etc. Thanks in advance.

    GS

  229. Soundar R says:

    Hi, I have home loan in LIC with Rs.12,00,000(12 Lakhs) with ROI – 10.2% till 2026. Now LIC is offering me home improvement loan for Rs.10,00,000 (Rs.10Lakhs) for 7 years with ROI 8.5% fixed through out the tenure. Now i am planning to take the home improvement loan of Rs.10Lakhs and prepay the first loan i.e Rs.12 Lakhs. So that i will be having two loans., one with around 2 Lakhs (10.2 %) and another with 10 lakhs (8.5%). It seems i need to spend some Rs.15,000/- for new loan for MODT,processing fees.

    Please advise whether i can go ahead and take this home improvement loan. It is very urgent.

  230. md.kaleemullah says:

    what are the charges levied towards part payment of hdfc home loan and what is meant by source description with source amount breakup –please enlighten . thnaks

  231. Hi GS,
    We have updated the post with a fresh new option 6 ! If you need any help to get this setup for you, please email us at info@banyanfa.com with your contat details and we can help you out.

  232. Hi Soundar,
    Firstly you need to clarify with LIC if you can use the new loan to pre-pay the old loan. If you can, then it sounds like a good option to reduce your cost of borrowing by 1.7%. The amount of money spent towards processing fees will be saved in the first year interest saving itself of the new loan.

  233. Hello Mr. Kaleemullah,
    For most of the homeloans, you could prepay without any charges as long it is from your own sources. Banks will want to check if the source of your prepayment amount is coming from your own saving or via a loan / gift taken from friends / family as this is not allowed. Please check with your respective bank for the specific terms and conditions on prepayment.

  234. Murli says:

    Sir,

    I have taken Home loan from HDFC for 20 Yrs in 2013. Now the principle balance is @ 28 Lakhs. My father is planning to give some 25 lakhs as a Gift. Kindly advice can I use this money for prepayment. In this case what is the document I need to submit to bank for this Money.

  235. Bunny says:

    I am planning to close my Home loan with all my savings. I have total of 16 lakhs home loan. Its been 9 years I have take loan from LIC HFL, Total Loan amount is 18 Lakhs. I didnt paid any par payment. After 9 years the principal it got reduced is 2 lakhs. Please guide me will it be fine to close Home loan with all my savings, my situation is like i will not be having single penny as saving for emergency also.

  236. Murli,
    Generally the banks would check for the source of funds used for repayments. They do not allow gifts from friends and family members. However, do check with your bank if this could be considered toward prepayment. Banks may request for your bank statement to check for the large credits and aim to understand if the credits are from your own source of income or gifts.

  237. Bunny,
    Using your entire saving toward closing of home loan may not be a good option considering you would not be left with emergency funds as well. Instead, you may partly pre-pay the loan. Ask LIC HFL on the max amount they allow as pre-payment per year.

  238. I have a sanctioned HDFC Adjustable Rate home loan of 27 lakhs currently at 9.7% interest rate with a tenure of 20 years.

    I currently have an option to reduce the interest rate to 9.55 % by paying a conversion fee of Rs. 10,500 /-

    I fall into the 30% tax slab without the home loan exemption and 20 % tax slab with the home loan exemption.

    I also have a savings of 7 lakhs which I saved through a recurring deposit.
    I can save close to 70K per month after paying the EMI

    My Questions :

    1) Should I go for the conversion of interest rate to 9.55 % by paying the Rs.10500 ?

    2) Is it financially wise to prepay the loan ? Does HDFC generally have any prepayment charges ?

    3) Can I reduce the tenure to 10 years from the current 20 years tenure without any charges ?

    Final question which is a generic one :
    —————————————————-
    For a self occupied property (where only a 2 lakhs exemption is allowed) and if a person would fall in the 30% tax bracket

    Does it make sense to pay off the loan quickly by regular prepayments if there is a bandwidth

    OR

    Does it make sense to keep the interest component close to 2 lakhs (+/-) for a reasonable number of years to be able to claim exemption ?

    Hope this questions help your impressive user base. Thanks a LOT for the financial knowledge and support that you provide through this website.

  239. Jayaraj says:

    Sir,
    I Have a housing loan in LIC hfl for 2200000 laks at a rate of 10.95 percent fixed rate for 10 yes and then floating. I have a source of gold worth 5 laks which I’m planning to sell and repay the loan amt partially considering my emi would reduce up to 8000 per month which I can Dave and purchase the same gold on yearly basis of 1 lake each year. Is this a correct decision. Second is that I see the rate of interest for floating is at least a percentage less than what I’m paying now approximately around 9.95 percent. Can I switch over to floating rate of interest. Please suggest

  240. Jayaraj says:

    The total loan tenure is 15 yes…sorry I didn’t mention it in my earlier post

  241. Hello,

    We dont’ think that it is mouth watering deal which is saving your 0.15% after paying 10K odd. You will need 2.5 years to break even this cost. In stead, wait for 2 years and you may get better rates in the market as we are heading towards lower interest rate regime.

    Banks don’t levy pre-payment charges as long as you have done it from your own sources. If you have no other investment option, you may consider pre-payment.

    A better option will be to invest any extra surplus cash flows which you have into Mutual Fund SIPs for 20 years. The return from the SIPs have the potential to make multi times return compared to the interest cost you may save by pre-payment.

  242. Jayaraj,
    Please ask with LIC HFL if they allow changing from Fixed to Floating and the costs. You could even think about moving to a bank which may offer your around 9.75%.
    Selling gold and repaying some loan looks like a good idea as the growth in gold as an investment may be similar to your interest on loan.

  243. sbh customer says:

    I had took a loan for 48 lakhs from SBH at 9.75% interest rate of EMI INR 664400 for 10 years (120 months) I finished 3 year EMI, (36 months) that is INR 2390400. Now I want to close this loan ,but my bank demanding nearly 39 lakhs . Is it advisable to close this loan now or any other methods to reduce that 39 lakhs from the bank. Kindly advise me.

  244. Vardhan says:

    Hai
    I am Taking 25 Lakhs Home Loan from Axis bank at 9.35 % intrest for 20 years. After 2 years I will pay back 8 Lakhs as prepayment to loan.
    I want to reduce tenure to 10 years .
    What wilp be the EMI amount?

  245. Balaji says:

    Hi

    I have a loan amount of Rs.48,00,000 ( tenure is 25yr ) from LIC HFL with 10% fixed interest rate for Ist 3 yrs and then floating. The fixed interest period is going to end by this month. Iam planning to do a partial payment of Rs.10 lack which I save from last 3 yr, so that I can reduce the tenure. Will this bulk amount will get deducted from the principle or from interest amount !!

    Is it advisable to do so, or is there any other best option to go on. Your expert advice will really help us.

  246. Dayanananda N says:

    Hello,
    I am planning to buy a house, gated community near hosur ( bagepalli 2.5 km from Attibele) at cost of 32lacks,
    I am from bangalore, but this land come under Tamilunadu.
    My family is fine relocating to hosur, but I am in dileamma,
    whether to move or not.
    Few questions:
    1) this property home loan in 26 lacks, with emi 22898 for 300monhts
    is this a good to buy property
    2) Can I get a property for this price in bangalore.

    Me being kannadiga I am not so comfotable settling down in Tamil nadu.
    Please help me decide.
    thanks
    Dayananda N

  247. Balaji,
    Any pre-payment will result in reduction of your principal. You can refer to this link for prepayment http://insight.banyanfa.com/home-loan-prepayment/

  248. Hi,
    In your initial few years of the home loan prepayment, you are mostly paying interest to the bank with very limited principal payment. You can see the article for more details on home loan prepayment http://insight.banyanfa.com/home-loan-prepayment/

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Delhi – Odd Vs Even Formula

January 2, 2016January 2, 2016

The actual success of the Delhi government’s odd-even formula will be known only by January 15, but if the response of most Delhiities on the first day is any indicator, then the risk taken by Arvind Kejriwal’s Aam Aadmi Party seems to have paid off.

The local government will review the effect on pollution after the 15-day trial and consider including two-wheelers in the second phase of the scheme.

For more click here